Winds of War

Likewise, in natural resource markets, the most costly blunder is to underestimate
how far prices can go.

And today, the tendency to make both of these errors is more deeply
ingrained in the behavior patterns of Washington and Wall Street than at any
time since the Vietnam War.

Case in point: The tyranny of Iran and the irony of oil.

The Tyranny of Iran

Iran is the rogue terrorist state with chemical weapons and nuclear programs
that Iraq turned out not to be.

Iran is the only country on the planet that is directly supporting international
terrorism, officially vowing the destruction of another state, and openly defying
the community of nations.

Iran is also the one country in the world today with both the ideology and
the ability to take down the global economy.

And yet, while Tehran seems to have the chessboard of what-ifs and contingency
plans mapped out, Washington is still playing checkers.

Here's how each and every move by the U.S. and its allies could be checkmated.

Move #1
Sanctions

On Friday, the UN's International Atomic Energy Agency (IAEA) slammed Iran
for non-compliance with its ultimatum to cease its nuclear enrichment program.
Now, to retain even a modicum of credibility, the UN's Security Council has
no choice: It must respond with punitive action.

Almost immediately, the U.S. is going to move for a resolution under Chapter
7 of the UN charter, which includes the threat of military action.

To pass, the resolution requires a unanimous vote from all five permanent
members - United States, Britain, France, China and Russia. But if China or
Russia threaten to veto the resolution, the U.S. will offer them some concessions
to win them over.

And even if the Security Council is still stalemated, the U.S. has
vowed to bypass the United Nations, team up with as many other countries as
are willing, and slap Iran with its own sanctions - freezing Iranian assets,
blocking travel by Iranian diplomats, and more.

Checkmate: The oil weapon! In an
interview with the Wall Street Journal last week, Iran's Oil Minister
Kazem Vaziri Hamaneh flatly told the world precisely what the world should
already know - that Iran has the capacity and the willingness to disrupt
world oil markets. His exact words:

"The need of the world for energy is soaring, and if Iran is taken out of
the equation, prices will shoot up and there will be big difficulties in
the energy markets."

Indeed, just the threat of a temporary slowdown in Iranian crude
oil exports has already helped drive prices to their highest level in history.
So imagine what the impact will be if Iran actually removes some portion of
its oil from the market!

Iran currently exports 2.5 million barrels of oil per day. But the margin
of excess supply available in the world today is, at best, ranging from 0.5
to 1 million barrels per day. So to wipe out most or all of the excess, all
Iran would have to do is cut off about one-quarter of its exports.

Yesterday's Contra Costa Times puts it this way:

"Iran's key ally in the current nuclear crisis is not Russia or China. It's
oil. Tehran can easily drive up prices and is already beginning to do so
to rattle the West. In the end, Iran's petro power will probably trump Western
diplomacy.

"Just look at what's happening: Tehran's bravado announcement April 11 that
it had mastered key nuclear technology ... drove oil prices to more than
$70. Prices have risen more than $8 a barrel in less than three weeks, primarily
because of Iran."

In short, Iran has the most powerful economic leverage of any rogue country
in modern history.

Move #2
The Threat of Military Action

If the U.S. gets its way in the Security Council, it will be the United Nations
that threatens military action against Iran.

If the U.S. doesn't get its way, and the final Security Council resolution
is watered down, it will threaten military action independently or with leading
European nations.

"Israeli Intelligence chief Dagan has declared that a nuclear Iran is 'the
worst-ever threat' to the country's existence. Israel's Defense Minister
Shaul Mofaz has stated that 'under no circumstances would Israel be able
to tolerate nuclear weapons in Iranian possession.' Israeli Intelligence
has even revealed plans for attacks by F-16 bombers."

And just last week, Israel's interim prime minister, Ehud Olmert, made a statement
which can only be interpreted as the prelude to a declaration of war:

"[Iran's president] Ahmadinejad speaks today like Hitler before taking power.
He speaks of the complete destruction and annihilation of the Jewish people.
... We are dealing with a psychopath of the worst kind ..."

Checkmate:
The Strait of Hormuz! This is the narrow,
four-mile corridor between Iran and Oman through which every single tanker
leaving the Persian Gulf must pass ... the single most vital "choke point" on
the planet ... the one strategic location that, if disrupted, could sink
the global economy.

And yet, it sits right in the bowels of Iran.

This is not something Iran is ignoring. Indeed, less than one month ago, the
Supreme Commander of Iran's Islamic Revolutionary Guard, Major General Yahya
Rahim Safavi, called the Strait of Hormuz the "economic lifeline" of the West
and said Iran could use it as a vehicle for wreaking economic havoc.

Nor is this a novel idea. During the Iran-Iraq war, Iran's President Ali Rafsanjani
said: "We would close the Strait of Hormuz if the Gulf became unusable for
us. And if the Gulf becomes unusable for us, we will make the Gulf unusable
for others."

How would Iran block the Strait of Hormuz? John Burke, an ex-Marine intelligence
specialist and a member of our Money and Markets team, explains it this
way:

"It can also deploy its vast array of sea, air and land-launched missiles
targeting commercial and military ships that must pass through the Strait.

"Although the West might prevail and secure the Strait, the cost of that victory
could ultimately amount to nearly doubling the world's oil bill and more than
doubling your gas bills."

Is John overstating the case for exploding oil prices? I think not. The Persian
Gulf is responsible for

32% of the world's oil production capacity ...

45% of the world's natural gas ...

57% of the world's oil reserves, and ...

100% (and more!) of the world's excess capacity.

Problem:
About 90% of this oil and gas passes through the Strait of Hormuz. Only about
10% leaves the region through alternate routes, such as East-West oil pipeline
across Saudi Arabia to the port of Yanbu or the Abqaiq-Yanbu natural gas line
across Saudi Arabia to the Red Sea. And even those alternate routes are vulnerable
to attack by Iran or by terrorists.

Bottom line: Just as soon as - or even before - the West threatens Iran with
military action, Iran can threaten the Strait of Hormuz, cut off up to one-third
of the world's energy supply, and drive prices into the stratosphere.

Move #3
Pre-Emptive Attack

Remember: U.S. officials may be talking diplomacy. But they're thinking military
action.

The only major question remaining: who would launch the first pre-emptive
strikes against Iran? The United States or Israel?

It would certainly not be a novel event for either country.

Under similar, but less threatening, circumstances, the U.S. has launched
pre-emptive air attacks on Libya, Sudan and Iraq. And back in 1981, when it
was feared Saddam Hussein was developing the capability to build a nuclear
weapon, Israel launched a preemptive attack to destroy Iraq's nuclear reactor
in Osirak.

So no one in their right mind should scoff at the notion of the U.S. or Israel
striking key strategic targets on Iranian soil.

Checkmate:
The threat of international terrorism that would make al Qaeda seem tame
by comparison.

I warned you about this on March 13 (see Stealth
War) when no one wanted to talk about it. Now, it's all over the press.

At that time, I wrote:

"Washington still thinks al Qaeda is the biggest threat to America's interests.
But in the days ahead, you're going to hear more about an organization that
most Americans never knew existed: al Quds.

"Unlike al Qaeda, al Quds is not a nationless, renegade band. It's a highly
organized strike force now operating in Iraq under the control of Iran's elite
Revolutionary Guard.

"And unlike al Qaeda, al Quds doesn't have to beg for refuge or financing.
It gets all the protection it needs on Iranian soil ... and all its funding
from the Iranian treasury, which, in turn, is liberally lubricated with oil
money.

"Moreover, al Quds (meaning "Jerusalem") is not an upstart band.
For about two decades, al Quds has been operating in Lebanon, providing military
guidance and support for terrorist attacks against Israel, especially those
carried out by Hezbollah and other Islamic terrorist organizations.

"For many years, al Quds has also been operating as an elite international
hit squad, responsible for political assassination in Europe and the Middle
East.

"Most disturbing of all, al Quds is joined at the hip with the most powerful
militia currently operating in Iraq - the Badr Brigade ...

"Moreover, a person who has played a prominent leadership role in the founding
and training of both al Quds and the Badr Brigade is none other than Mahmoud
Ahmadinejad, now the president of Iran."

In sum, even without deploying its chemical weapons and even without playing
the nuclear card, Iran has three ways it can checkmate the West. Iran can:

Choke off all or most of the world's excess oil supplies simply by slowing
down its own oil exports.

Cut off as much as one-third of the world's energy supplies!

Terrorize the globe in a way that would make al Qaeda look like an impotent
eunuch.

The Irony of Oil

Despite all these threats, most people regard oil as "already high" and therefore "unlikely
to go that much higher."

It's the classic mistake made by amateurs and professionals alike.

Their
error: They greatly underestimate the potential surge in the price of natural
resources that are both critical and scarce.

The key to remember:

Even without a crisis in the Middle East or a blow-up in the Persian
Gulf, oil prices have been moving inexorably higher for four years. Even absent
the three ways Iran can checkmate the West, the surging worldwide demand for
oil is unwavering.

That's what's responsible for the long-term uptrend in oil prices that you
can see in this chart. And that's what is now driving oil prices to $80, $90,
or even $100 per barrel.

So with any retaliation by Iran against UN or U.S. sanctions, you can expect
oil prices to rise at an even faster clip, accelerating above and beyond its
current pathway.

Does this kind of acceleration actually occur with some degree of frequency
in natural resource markets? Absolutely. In fact, it's just happened in a market
that often foreshadows the moves in oil and other natural resources - gold.

Like
the crude oil market right now, last year's gold market was also moving upward
in a steady channel. And like the crude oil market, gold is driven higher both
by cyclical economic forces and geopolitical threats.

The difference: Gold is a smaller market and more sensitive to these threats.
Oil markets are broader and take a bit longer to react.

That's why gold's rise has accelerated this year, while oil's price rise has
still been contained to a steady upward pace. That's why gold went through
the roof on Friday, but oil was a bit slower to move.

But what you see today in gold is a sneak preview of what you may soon see
in oil, especially now that the Iran crisis is on the verge of blowing up.

What to Do

You don't have to assume a crisis to invest in this situation. Even if Iran
and the West kiss and make up, oil is being driven higher by surging demand:

American drivers are complaining loudly about pain at the pump, but they're
doing next to nothing to cut back on their gas-guzzling driving.

China and India are choking on the smog, but they're not lifting a finger
to hold back their industrial juggernauts.

So the only way oil prices are going to come down is if they go up sharply
first. Dramatically higher oil is the only force capable of curtailing demand.
And therein lies the irony of oil.

That irony, however, is your profit opportunity. It gives you the relative
certainty you need to help reduce downside risk ... plus the relatively good
probability of blowout success.

No one can predict the future with precision, and risk of loss is forever
present. But it's this kind of heads-you-win-tails-they-lose situation that's
the holy grail of investing.

And for funds you can afford to invest more aggressively, go for the greatest
leverage of all, with a nice comfortable time horizon, and with a risk that
can never exceed your investment.

One last word: No matter how strongly you may feel about this opportunity
- or any other for that matter - always be sure to invest most of your money
conservatively, with a big allocation to short-term Treasury securities or
equivalent, as far as possible from harm's way.

MONEY AND MARKETS (MAM) is published by Weiss Research,
Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and
other contributors. To avoid conflicts of interest, Weiss Research and its
staff do not hold positions in companies recommended in MAM. Nor do we accept
any compensation for such recommendations. The comments, graphs, forecasts,
and indices published in MAM are based upon data whose accuracy is deemed reliable
but not guaranteed. Performance returns cited are derived from our best estimates
but must be considered hypothetical inasmuch as we do not track the actual
prices investors pay or receive. Contributors include Jennifer Moran, John
Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson,
Monica Lewman-Garcia, Julie Trudeau and others.